ITO, WARD-8(1), NEW DELHI vs. ECOSPHERE AGROFARMS P.LTD, NEW DELHI

Against the said order, the assessee preferred an appeal before Ld. CIT(A) who vide order dated 26.03.2019 deleted the addition made by AO.

6. Ld. Sr. DR for the Revenue vehemently supported the order of the AO and submits that assessee has failed to provide details based Page | 2 on which the projections were made by the valuer under DCF method for computing the value of the shares issued by the assessee. Ld. Sr. DR further submits that since the AO has doubted the methodology adopted for computing the prices of the shares as per DCF method therefore, Ld. CIT(A) is not correct in deleting the additions by holding that the AO cannot tinkered into the method adopted by the assessee. Ld. Sr. DR submits that the AO has not doubted the method whether DCF method should be applied or NAV method should be applied. Rather the AO has asked the assessee to provide the basis and details for projection of the data under DCF method therefore, she prayed for restoration of the additions made by AO.

7. On the other hand, Ld. AR for the assessee submits that assessee has followed DCF method for valuation of preferential shares issued during the year. It is further submitted that the assessee has issued preferential shares therefore, provision of section 56(2)(viib) of the Act are not applicable which are applicable for the issue of equity shares. Ld. AR submits that assessee has filed valuation report obtained from Chartered Accountant before the lower authorities which is available in the Paper Book. He further drew our attention to the feasibility report which is filed before the AO available at pages 52 to 326 of PB, based on which valuer has made the valuation of the shares issued by the assessee. Ld.AR submits that merely for the reason that the valuer in the Valuation Report observed that this Report is based on the information provided by the assessee, it was rejected by the AO. Ld.AR submits that it is Page | 3 upon the assessee to choose any of the methods provided under Rule 11UA of the Income Tax Rules, 1962 (“the Rules”) for computing the fair market value of the shares which cannot be discarded by AO. Once the assessee has exercised its option of choosing one of the method, AO cannot change such method. He, therefore, submits that Ld. CIT(A) has rightly deleted the additions made which order deserves to be uphold. He prayed accordingly.

8. Heard the contentions of both the parties and perused the material available on record. In the instant case, assessee has issued 44,000 Compulsory Convertible Preferential Shares (“CCPS”) at a face value of INR 10/- each at a premium of INR 990/- per share. The assessee has obtained the report from Chartered Accountant which was authorized in terms of Rule 11UA(2) of the Rules who had valued the shares by adopting DCF method. Once the assessee has taken DCF method as most appropriate method for valuation of shares, the AO has no power to change the said method. The main allegation of the AO is that assessee has not provided the details based on which the valuation was done. It is observed that the assessee vide letter dated 11.12.2017 placed at page 39 to 51 of PB, has provided all the details to the AO which were necessary for the purpose of the valuation of shares. Therefore, it cannot be said that assessee has failed to provide the requisite details. It is further observed that the AO has not pointed out any error in the Valuation Report submitted by the assessee. Ld. CIT(A) after considering these facts, has deleted the additions by making following observations:- Page | 4

4.3. “I have considered the facts of the case and the submission made by the AR. It has been contended that the Compulsorily Convertible Preference Shares (CCPS) were issued to the holding company of the appellant ie. M/s Breezfresh Dairy and Agrofarms Pvt. Ltd. Each CCPS had a face value of Rs. 10 and premium of Rs. 990/- per CCPS and each CCPS was convertible into 100 equity shares of Rs. 10 each. In view of this, the AR has submitted that the shares after conversion would be issued at face value of Rs. 10 each and therefore, effectively no premium was being charged in respect of the shares. The AR has contended that there is no doubt about the genuineness of the transactions. It is further submitted that the statute provides option to the appellant to value the shares by using DCF method or based on the net worth as per Rule 11UA(2) and the appellant has duly got the shares valued from the valuer by using DCF method. It is contended that it is beyond the jurisdiction of the AO to insist upon following one particular method. The AR has submitted that there is no rationale in comparing the projected and actual figures. The AR has relied upon various judgments in support of his claim. The AR was asked to justify the reasonableness of the projections based on which the shares/ CCPS have been valued by following DCF method. The AR submitted that the complete valuation report was filed before the AO along with the feasibility report prepared by professionals and the same has not been considered by the AO, The AR has submitted all these details along with the details of the project planned by the appellant. The main arguments of the appellant to defend the valuation of CCPS as per the valuation report are as under: i. The valuer has considered various factors including the feasibility report while doing the valuation; ii. The valuer has considered conservative selling price of milk which is taken at Rs. 25 per ltr. at the farm gate and Rs. 35 per ltr. in the local market as against the current prevailing price of cow milk at Rs. 45 per ltr; iii. The valuer has considered conservative yield of the cows as against the optimum average yield; iv. In fact, there is no premium charged because each equity share will be issued at face value of Rs. 10 only. 4.3.1. On perusal of the arguments of the appellant, it is observed that the appellant had an option of two methods to value the fair market value of the shares and it has chosen to value the shares as per the DCF method for which valuation report was submitted. After considering the various factors adopted by the valuer to value each CCPS as discussed above, I am of the view that it cannot be said that there was no reasonable basis for the projections made in the Page | 5 valuation report. In this regard, reference is also made to the decision of Hon'ble ITAT, Jaipur Bench in case of M/s. Rameshwaram Strong Glass (P) Ltd. V/s ITO, in which it has been held that when the law has specifically provided a method of valuation and the assessee exercised an option by choosing a particular method, changing the method or adopting a different method would be beyond the powers of the revenue authorities. It is further held that the DCF Method is essentially based on the projections (estimations) and hence these projections cannot be compared with the actuals to expect the same figures as were projected. 4.3.2. Further, reference is made to the decision of Hon'ble Delhi ITAT in the case of Stryton Exim India P.Ltd, vs ITO, in in which vide order dated 23 October, 2018, it has been held that- "The learned assessing officer as well as the learned commissioner appeals rejected the valuation report submitted by the assessee for the sole reason that projections shown by the assessee in the project report of the cash flow did not materialize in subsequent years. It was also the reason for rejection of these reports as the chartered accountant who valued the shares of the company has given a proper disclaimer while certifying the valuation. On careful consideration of the reasons given by the learned assessing officer the assessee has clearly stated that the valuation report is properly dated and further it may happen that the projected cash flow shown by the assessee at the time of the valuation did not materialize in subsequent year due to different business reasons such as delay in the project. The assessee has shown that there is a delay in the project and subsequently the LLC company has started earning the sum. If that be the case that if there is a variation in the discounted cash flow shown by the assessee with actual result in subsequent years, then the basic fallacy will arise that discounted future cash flow should be equal to the actual cash flow of the assessee. According to us it will result in absurdity. However it can also not be subscribed to the view that if there are wide variations in subsequent years with actual results compared with the projected cash flow submitted by the assessee, then in such situation if the projected cash floor is accepted then provisions of section 56(2)(vib) will become redundant. Therefore an objective evaluation of the valuation report submitted by the assessee deserves to be carried out. Further, the valuation report is prepared by the professionals such as chartered accountant, or merchant bankers for which their respective professional bodies have laid down specific Page | 6 disclosure requirements. Those disclosure requirements are binding on them. Therefore merely because they have given certain caveats and disclaimers, those factors should not sway the mind of the learned assessing officers or commissioner appeals." 4.4. In view of the above facts and the legal position, I am of the view that the AO cannot change the method of valuation of shares adopted by the assessees and the projected figures cannot be compared blindly with the actuals to state that the valuation report is not correct. However, the AO is competent and within his powers to look into the fact whether the valuation report is fair and reasonable. In the present case, the AO has not found any specific error in the valuation report. The valuer is bound to give disclaimers as the valuer cannot be expected to determine the exact value as the same is not feasible. As already discussed above, the valuer has adopted reasonable projections than the optimum figures for generation of revenue and the valuation of shares done by the valuer has got reasonable basis. Moreover, as argued by the AR, there is no premium charged because each equity share will be issued at face value of Rs. 10 only on conversion of each CCPS into 100 equity shares. In view of these facts, the addition made by the AO is deleted and the grounds of appeal are allowed.”

9. The Co-ordinate Bench of the Tribunal in the case of M/s. Breezefresh Dairy & Agro Farms Pvt. Ltd. vs ITO in [Assessment Year 2015-16] dated 27.10.2023 has deleted the additions made u/s 56(2)(viib) of the Act by making following observations:- 19. “The Assessing Officer disregarded the valuation report mainly on the ground that the valuation of equity shares was based on the projections of the revenue which was not there. The assessee has applied DCF Method for the purpose of valuation of shares and has relied on the valuation report of an expert valuer.

the Rockland Diagnostics Services Pvt. Ltd. vs. ITO case of Intelligrape Software Pvt. Ltd., vs. ITO in 2018 (Delhi Trib.), it has been held as under: "23. The AO was not able to pinpoint any specific inaccuracies or short comings in the DCF valuation report of the Chartered Accountant/Valuer other than stating that year-wise results as projected are not matching with the actual results declared in the final accounts. Before the Id. CIT (A), reasons for variation between projected and actuals were duly explained. The Ld. CIT (A) has accepted such explanation but rejected the DCF valuation report as submitted by the assessee. Accordingly, in the absence of any defect in the valuation of shares arrived by the 11 assessee on the basis of DCF method, impugned addition as made on the basis of net asset value method is liable to be deleted. The rejection is unjustified as the valuation report is required under Rule 11UA of The Income Tax rules is based on the future aspects of the company at the time of issuing the shares, it may vary from the actual figures depending on the market condition at the present point of the time.